Investors given bloody nose as Knight Capital rescuers arrive

By PERRY GOURLEY
Published on 06/08/2012 18:55

A GROUP of investors is to step in and rescue market maker Knight Capital, the US trading group whose software glitch caused chaos on the New York Stock Exchange last week, in a $400 million (£256m) deal.

Although the deal will keep the firm afloat, existing shareholders will lose out, with
the new investors taking the lion’s share of the company’s equity.

NYSE said it will temporarily transfer Knight’s market-making responsibilities to Chicago-based Getco until the recapitalisation is complete.

The rescuing companies will buy convertible preference shares to save Knight, where the software problem caused false trading in dozens of stocks and left the group nursing huge losses.

Under the agreement, the investors will get a stake of around 70 per cent in the company. Sources familiar with the talks identified private equity firm Blackstone Group, Getco and financial services companies Jefferies Group, Stephens Stifel Nicolas and TD Ameritrade as the buyers.

JP Morgan analyst Kenneth Worthington predicted the rescue signalled Knight’s eventual break-up.

“We don’t expect investors to value Knight as an ongoing
entity given its technology glitch generated a pre-tax loss equal to about 30 per cent of shareholders’ equity and nearly wiped out the company in just 30 to 45 minutes of trading,” he said.

However, even if Knight has been saved for now, the company could face litigation from shareholders which have seen the value of their holdings plummet.

The potential liability could increase if it were found that Knight violated market rules. The top US securities regulator said on Friday that government lawyers were trying to determine if Knight violated a rule designed to protect the markets from rogue computer trading programmes.